Some mildly encouraging 2Q stuff in this report from the JIMBO PLAYHOUSE THREAD.
To: Richie (903 )
From: Kenya AA Tuesday, May 4 1999 10:31AM ET
Reply # of 948
MARCH MONTHLY MONITOR HIGHLIGHTS
08:04am EDT 4-May-99 Prudential Securities (K.ALEXY)
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o PC vendor and channel checks during the month suggest that corporate PC demand - which accelerated in March after a weaker-than-expected February - remained strong into the month of April. Demand in both North America and Europe improved while A/Pac accelerated and Latin America stabilized.
o We believe that if demand momentum continues to hold into the June quarter, PC unit growth could modestly increase sequentially vs. current expectations for flat/down units - providing upside to current estimates.
o After inventory levels in the channel climbed slightly in the March quarter, April channel inventory levels are now working back down. We believe aggregated channel inventory is running at 4 weeks.
o April is typically a soft month for consumer and retail PC demand. This month was no different with both vendor and retail checks noting seasonally soft demand trends during the month. ASP erosion accelerated during the month after easing in the prior month as a result of the P3 introduction.
o We continue to recommend purchase of Dell, Gateway, and Compaq shares. We believe Compaq shares will remain under pressure until evidence of new management changes becomes clearer. We remain neutral on the PC reseller stocks.
o While the disk drive companies have benefited from improved demand in March and April, pricing pressures have intensified; consequently, we have reduced our earnings estimates for many of the HDD vendors. In addition, we believe the aggregated Q/Q unit expectation for the June quarter may again be overly optimistic, setting the stage for further pricing pressures in the June quarter.
We remain neutral on the group at this time.
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PC Demand Themes
The acceleration in corporate PC demand noted for the month of March has held into April with most channel and vendor checks noting healthy demand trends in both U.S. and European markets. Demand in Asia Pacific - excluding Japan - has also accelerated while demand in Latin America has stabilized.
Pricing trends have also firmed - we believe as a result of the acceleration in end demand following a softer-than-expected January and February which triggered a more aggressive pricing environment earlier during the year. We believe margin trends in this segment are poised to improve sequentially as a result.
However, while corporate PC ASP declines moderated, consumer PC ASP declines accelerated during the month - following a moderation in March around the introduction of P3. We expect consumer PC ASP erosion will accelerate into the second half of 1999 as more vendors elect to participate in the market for lower price point systems.
During the month, several PC vendors noted their intention to increase focus on the sub-$1,000 segment of the consumer market. The success of vendors such as eMachines has illustrated the strength of demand in the sub-$600 price category.
To date, much of this demand has proved to be incremental - rather than cannibalizing demand for higher-priced systems.
Dell will enter into the sub-$1000 consumer PC space through the year, though we expect the bulk of the focus will be on price points between $800-$1,000.
In addition, Gateway noted its intention to increasingly participate in this market segment through focus on sub-$800 systems. We expect both companies will attempt to shift the profitability of these systems from "inside" to "outside" of the box through increased sales of bundled services, software, and other non-systems revenue streams. We believe the vendors who are best able to adapt to this environment will be those that can successfully capture the incremental
revenue opportunities, as well as those that can find sufficient offsets to counter-balance the anticipated ASP erosion. We believe both Dell and Gateway - with the direct sales model and corresponding ability to maximize Internet sales opportunity - are well positioned.
We believe that if demand momentum continues to hold into the June quarter, PC unit growth could modestly increase sequentially vs. current expectations for flat/down units. We believe such evidence could serve as a catalyst for the stocks - particularly in light of the fact that the June quarter is seasonally the softest quarter for the group. We continue to recommend purchase of Compaq, Dell, and Gateway shares. We believe Compaq shares, however, will remain under
near-term pressure until the management changes are resolved.
PC Channel Themes
Channel vendors noted improved demand trends during the month of April; still,revenues declined sequentially from March levels - in line with seasonal expectations. However, April demand levels were noted as definitively stronger than January (the first month of each quarter is typically compared to gauge the outlook for sequential growth). This suggests that channel vendors are tracking for sequential growth into the June quarter - suggesting potential for
some upside vs. our flat/down estimates for the PC companies.
Pricing pressures in the channel have eased in both the U.S. and European distribution markets. We believe that the combination of improved demand trends coupled with an increased focus by several distributors to expand profit levels has led to the change. In addition, we believe CHS's realization of actual profit levels (upon adjustment of vendor rebates that resulted in a restatement
of the company's margins and earnings for FY98) has led to improvements in the pricing environment in Europe.
PC channel inventory levels have declined modestly to an estimated 4 weeks and are expected to continue to decline into the June quarter.
We believe PC distributor stocks have become more attractive in light of both improved pricing trends and Compaq's recent moves which have served to re-empower the distributors. Channel companies generally noted that recent dealings with Compaq under the new management team have been encouraging and potentially more "channel friendly."
We expect PC reseller stocks, however, will remain under pressure as a result of increased vendor focus on direct initiatives in the large corporate market. We remain neutral on the group.
PC Retail Survey Highlights
Our survey of retail salespeople indicated that demand was in line with expectations for the (seasonally soft) month of April. Inventory levels in the retail channel remained lean and overall PC ASPs declined slightly during the month (on a weighted average basis). Retail selling prices for low-end bundles (CPU, monitor, and printer) averaged $1,008 (versus $1,052 in March); for mid-range bundles, the average retail selling price was $1,492 (versus $1,469 in
March); for high-end bundles, retail selling prices averaged $2,263 (versus $2,247 in March). The average percent mix of low-end, mid-range, and high-end systems sold was 42%, 36%, and 23%, respectively (versus 37%, 40%, and 23% for the prior month). The best selling brands continued to be Compaq and Hewlett Packard.
Data Storage Themes
During the month, disk drive vendors reported Q1 results. As expected, desktop drive unit demand - which had initially been expected to be flat/up sequentially - actually declined 2%, in line with seasonal trends. Industry softness during the month of February caused unit growth to decelerate mid-quarter, although subsequently, demand trends accelerated in mid-March and have held into April.
However, while demand accelerated, pricing pressures intensified.
Price erosion accelerated at quarter-end and remained aggressive into April. We believe that pricing pressures have intensified as a result of several vendors now shipping in volume sweet spot product on the desktop - 4.X GB/platter. As a result of the number of vendors with volume supply, coupled with limited ability to differentiate product amongst vendors at this time, price has become the primary differentiator. Next generation product is not expected in volume
until late in the second quarter and as a result, pricing pressures will remain aggressive into the June quarter; consequently, we recently reduced our earnings estimates for Maxtor, Quantum and Western Digital.
Interestingly, initial Q2 forecasts set forth by the HDD vendors suggested sequential unit growth >5% vs. traditional seasonal expectations for flat/slightly down units. If PC demand momentum holds, this assumption may not be unrealistic. Yet, the fact that expectations are currently set above seasonal norms certainly eliminates any likely upside and further increases the
risk for disappointment. In addition, if this level of sequential unit growth does not materialize, there is increased risk for further pricing pressures into the June quarter.
The bottom line is that we believe near-term trends for the drive companies are getting worse and not better. We believe the upcoming product transition to 6.XGB GMR on the desktop could serve as a catalyst for the shares, assuming at least 1 or 2 vendors fails to successfully execute the transition. Still, such a scenario would not be evident until early Q3. In the near term, we believe there is increased risk around June quarter earnings and remain neutral on the
group at this time.
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